Canadian LPs Figure Out Entry into the U.S. and 16 Stories from New Cannabis Ventures

This is a copy of the November 11th edition of our weekly Newsletter, which we have been publishing since October 2015.

Friends,

In late 2017, the Toronto Stock Exchange issued new rules that effectively locked out Canadian LPs listed on the TSX or TSX Venture from participating in the U.S. cannabis industry. The poster child of the policy change was Aphria, which, after a protracted battle with the exchange, was forced to begin to divest its ownership in Liberty Health Sciences. Earlier this year when it moved from the CSE to the TSX, CannTrust was required to assign intellectual property rights related to its patented single-serving cannabis-infused coffee pod. Just a few months ago, it seemed that the world’s biggest cannabis market was off-limits to the Canadian LPs unless they were willing to downgrade their listing.

This situation is changing rapidly, as it appears the lawyers and bankers have figured out how to structure deals that will permit LPs to have interests in the U.S. Aphria, for example, shifted its remaining ownership in Liberty to Serruya Private Equity in a deal announced on September 6th, with Aphria receiving $59.1 million in the form of a 5-year promissory note bearing 12% interest in exchange for 64.1 million shares of Liberty. Aphria retained a call option on the shares that will enable it to reestablish its equity position in the event cannabis is federally legalized or the TSX permits ownership. CannTrust gave up the royalties that it would have earned in the U.S. for $1, but it has the right to repurchase the rights for $1 if cannabis is legalized federally in the U.S., if the TSX changes its rules, if the company delists from the TSX or if the company is acquired.

We don’t believe it is widely understood that other TSX-listed LPs have moved to commence their exposure to the U.S. in a way that complies with the TSX rules, including Aurora Cannabis and Canopy Growth. These moves could have profound implications for these companies as well as the industry. Canopy Growth as well as Canopy Rivers recently restructured their investments in CSE-listed TerrAscend when the company made the strategic decision to enter the U.S., swapping their equity stakes for “exchangeable shares” that will not permit them voting rights or any dividends. In the future, if the rules for the TSX change, which could happen without full legalization, or if cannabis is legalized federally, then Canopy and Canopy Rivers will be able to convert their securities into common shares.

Aurora Cannabis took a different approach, spinning out shares in a newly created company, Australis Capital, and contributing two minor assets. Aurora received a warrant to purchase 20% of the company at $0.20 per share that can be exercised for 10 years and another warrant to purchase 20% at a price based on the trading price in the future. To be clear, Australis is independent of Aurora but will benefit from the relationship as it operates effectively as the American arm of Aurora. In the future, if the TSX rules change or cannabis becomes federally legalized, Aurora will have a major stake in Australis, which has already begun to deploy capital with three transactions announced since the company began trading in September.

Through creative ownership structures, some of the largest Canadian LPs, three of which trade on the NYSE a well, have figured out how to participate in the land-grab for American cannabis assets while remaining compliant with the TSX. We expect that other LPs will take a more aggressive stance on entering the U.S., though a key element to the success of these arrangements is that the partners must trust one another, as the LPs are blocked from actually influencing the businesses. The ability of the largest LPs to effectively enter the U.S. market bodes well not only for their future but also likely improves the availability of capital to the American cannabis industry.

To learn more about Australis Capital, a client of New Cannabis Ventures, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button in order to stay up to date with their progress.

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Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email